Friday, August 27, 2010

GRP – FY 2010 Analysis and Review

GRP released their FY 2010 results on August 20, 2010 (the company has a June 30 year-end). Suffice to say that there were no major surprises; either negative or positive, but the prevailing sentiment from me is that the Company can do more to either increase their dividend or to reinvest the cash which is just piling up. There was not much articulated about how the cash will be utilized or how the business would be grown beyond what it is now; so it was quite a disappointment for me. I will go through the usual review and analysis which will be kept brief as this is a simple company to analyze; but I will focus at the end on what I’d expect from the Company in FY 2011 and how I hope it can communicate better to shareholders.

Financial Analysis

Profit & Loss Statement

Revenue was essentially flat, rising just 1.4% from S$25.3 million to S$25.6 million; and was mainly due to the weakness in Hoses and Marine as well as the PVC pipes division (in China). Cost of goods sold, however, increased by 6.2%, which resulted in gross profit falling by 6% from S$10 million to S$9.4 million. Gross margin fell from 39.6% to 36.7% mainly due to exchange differences in the Measuring Instruments division (so I understand it is unlikely to persist). Other revenues consisted of rental revenue from their property at 1 Bukit Batok Street, which terminated in April 2010. Henceforth, from April 2010, GRP will no longer enjoy rental income. This was a factor which I had accounted for initially when investing in GRP; and more will be said on this in the review of the Cash Flow Statement section, which is key to this investment as it is a yield play.

Profit for the year actually dipped only 3.1% due to the reduction in distribution costs by 5.7% and decrease in administrative expenses by 14.2%. These two items helped to mitigate the impact of lower gross margin and lower revenues by blunting their impact; and allowing net profit to remain flat.

Balance Sheet Review

GRP’s Balance Sheet has traditionally been very “clean” and spartan! For this review, the same can be said, although Trade Debtors did inch up a little; but was offset by yet higher cash balances of S$14.5 million compared to S$13.6 million a year ago. However, Trade Payables and Income Tax payables decreased which brought current liabilities down to just S$4.4 million from S$5.5 million a year ago. The result of this was an increase in current ratio from 4.77 to 5.99 over just a year! It really boggles the mind to know that the current ratio keeps increasing year after year till it’s about 6.0 this financial year, yet Management has yet to declare a special dividend to utilized all that cash! ROE stands at 15.2% as the cash has added on “drag” to the ROE. Last year’s ROE was 17.5% and was noticeably higher.

Cash Flow Statement Review

Cash flows from operations continue to be positive for GRP for FY 2010, at S$4.2 million versus S$5.5 million for FY 2009. Capex was very low at just S$240K (it was just S$175K for FY 2009); meaning there was FCF of about S$3.8 million for FY 2010. Assuming the rental income of about S$2 million is removed for FY 2011, there will still be FCF of about S$1.8 million assuming business conditions, revenues and net profits remain largely stagnant. Perhaps this is one reason why GRP does not want to pay out more dividends; because their cash flows may be in danger in FY 2011 and Management have decided to be prudent and conserve some cash in order to make future dividends more sustainable.

Prospects and Plans

There is some concern about a slowdown in the Company’s business because of their prospect statement stating that market conditions will remain “challenging” in the next 12 months. Even though they have a very good track record of stable revenues and cash flows for the last 8 years, I must warn that past performance is not indicative of future performance. I am cautiously optimistic that the Company can continue to provide a decent yield of 2 cents/share, which translates into a 10% yield at my purchase price.

I acknowledge that the concept of a low risk, high yield investment does not exist in this world except in concept; due to the nature of business cycles and competition, any so-called competitive advantage and moat which cannot be suitably maintained will eventually be eroded through time (just as a steady drip of water droplets can, over time, penetrate a block of stone). Companies which continue to innovate and think of novel ideas to package and sell their products and/or services will continue to flourish. Those who are not able to do so will naturally fall by the wayside, and are either soon forgotten or remembered for the sake of use in classroom textbooks for business students. Let’s all hope GRP can continue to maintain some edge in maintaining the business (and drawing in cash flows) and not end up as a cigar butt with no more puff left......


ryan.goh said...

Hi MW,

kazukirai from the Afralug forum here. Miss the gd 'ol forum.

Anyway, regarding your post on GRP. You note that Cashflow in FY2011 maybe reduced by about $2m. But in segment 13 of their report, there is a direct expense of $1.658m related to revenue under the 'property' segment, leaving a revenue of $0.526m.

Is this 'direct expense' not an outflow of cash? Or is it accumulated depreciation? Would love your answer.

If GRP's going to see a drop in cashinflow of ~ $2m next year, that's pretty worrying. But if that 'direct expense' is an outflow this year, then even without the property income next year, things don't look too bad ya?

Musicwhiz said...

Hi Ryan,

Yes, I do miss it too. Am trying to work something out with Azlan )the Admin) but so far he has not emailed me. Someone does have his contact though and I am liaising with him to see what's wrong. Give it time though - I don't know what the problem is but it seems serious this time....

As for GRP, yes interesting that I missed it out! The expenses relating to the property do indeed sum up to $1.658 million, and are proobably accounted for under the expenses portion of the P&L. So the associated impact will not be as much as $2 million.

Thanks for pointing it out! Though I am still not sure why Management are holding all that cash. I hope it's not because they forsee a major slowdown in the business.....

Thanks and Regards,

ryan.goh said...

Ok, great thing that cashflow won't be reduces by that much. What management plans to do with all that cash is anybody's guess. Maybe we'll get some answers at the AGM. Are you planning to go?

Great that there's some news on the forum. Are you going to do a public service annoucement on your blog once the forum's back? I've been checking out the InvestIdeas and CNA forums but just too much 'noise' on those forums. Great for entertainment but not for generating useful discussion. =)

Anonymous said...

Hi bro,

Have u listened to the Kingsmen recording yet?

Musicwhiz said...

Hi Ryan,

Nah I may not be going to the AGM; see how. Since there's not much growth in the business, I will not complain as long as I get my 10% yield. Depending on what's going to be mentioned in the Annual Report, I will make my decision then.

Well, sadly thus far there's no news from Azlan at all on the forum, or even why it's down for so long. I can only guess, but will provide an update should it come online again. Problem is a lot of the old quality posts may be permanently lost to the great stock market in the sky (as d.o.g. puts it). Lucky I managed to save some quality bits into Word Docs before the forum went down...


Musicwhiz said...


Nope so far I have not. But will get down to it pretty soon!


Drizzt said...

Hi Musicwhiz, I thought i hit shit when i saw that i also missed out on the 2 mil rental income.

The problem is that there is no direct investor relations channel for clarification on this part.

I took a small stake based on your heads up not too long ago and here is my take on their business >> Here is why I think GRP Ltd is a risky dividend income stock

Musicwhiz said...

Hi Drizzt,

Thanks for the link and write-up. Very well-done with all the nice charts and numbers!

To answer your question, I think the 10-year financials show very stable demand for the Group's products and the fact that they can maintain gross margins and keep net margins high also shows that the business is resilient and not so low barrier to entry as you may think. That is what I deduce from the numbers itself.

Though of course I do think there is significant risk in terms of a drop off of revenue in the future; which may explain why it is trading at such a high yield?


Drizzt said...

you see, they distribute these measuring instrument and hoses.

a strong moat is one if they are the master distrbutor in a marine industry centric country.

that would give them an edge. do you think they are a master distributor? i believe not for the measuring equipment.

no way to ask.